Part Five: THE AUDIENCE WANTS TO KNOW
MS. SMITH: Now we are ready for questions. If you have on a tie, it's going to
work against you. Questions will be directed primarily at the people on the stage. We are
going to run this until about 9:00, and then we'll break for some more networking.
AUDIENCE MEMBER: Hi. My name's Raj Khera. I run a company called GovCon. It's a
pretty popular Web site for government contractors. We started about a year and a half
ago, and we had maybe 100,000, 200,000 hits a month and we are up to three million a month
now. My question is, how do you know when you are ready for venture capital? We are doing
okay. I don't know if we need to get it. But I'm curious to hear your response.
MR. HELLER: Let me start by saying, rather than knowing when you are ready for
venture capital, I think the first question should be "do you need outside
capital?" My advice would be to wait as long as possible to get outside capital,
because we want your valuation to be as high as possible and, obviously, the longer you're
in business doing well, the higher the valuation. So I think that would be step one.
MR. MORINO: From day one the total amount of money we had in our company was a
thousand dollars. When we went public we had millions of dollars in the bank. If you don't
need the money, don't go for itunless it's a way of getting a superb partner. When
we went out, we started literally with a thousand dollars, only because we had to clear
the books. There was no money invested in the firm. It was all bootstrap. In fact, the
only reason we went publicwe did not need the cashwe needed the currency to do
acquisitions. There was no need for the cash in our business. We were cash rich for quite
MR BURTON: I think there are a couple of reasons why you might consider outside
capital. BST, my company, was similar to Mario's in that we did not bring in venture
capital for working capital. The first VC's we brought in were to take their money to buy
another company. I would say that the reason to have venture capital is if you're
constrained in your growth, number one, or number two, if you find somebody that you
really believe can help you network and further your cause, and the cost to have them do
that is a piece of your company, and that gets into relationships. I would suggest you
merchandise yourself and look for money, and when you need money, you'll be ready. You'll
have primed pump, so to speak. But I would not rush into it for the sake of having a VC on
your board and their glamour.
MS. SMITH: Any additional comments, Suzanne?
MS. HOOPER: Don't wait too long. Don't go out looking for venture capital when
you have $100,000, because you won't have a good negotiation point.
MS. SMITH: Did you hear what Suzanne said? Don't wait until you are down to your
MS. HOOPER: Yes, don't wait until it's too late. If you have a little money in
the bank or you are about to run out and try to negotiate with venture capitalists, you
don't have a very good stand. So you need to raise it a little bit earlier than you need
MS. SMITH: I will add one thing. I have been to a couple of venture capital
conferences recently, and have sat in on a couple of planning meetings for the MAVA
conference. It's clear that the companies that get to present largely will be
institutionally backed, and I do think that there is a positioning and PR element at some
point that people ought to consider.
AUDIENCE MEMBER: If anyone still wants to be an entrepreneur after hearing this,
I guess you're really determined. But one of the things that a lot of entrepreneurs
really, I think, are concerned about as they go to get moneyespecially the last
couple of years in a sort of overheated marketa lot of people are thinking about how
they are going to move on and move out of that business. Should entrepreneurs be concerned
about that or is that just a funding source?
MR. STEIN: I think that one of the things that I said was remember that the
venture capitalists want to get a good return on their money and the only way they get a
good return on their money is if they have a way of turning equity in your company into
money. So I think the extent to which you should think about exit strategy is that an
investor is to be your partner for a long time. What you ought to have in mind is how is
he going to turn this work into money. That's the point of view, I would think about it
MR. BURTON: I'd add one comment. If you're building a company, you're doing it
as a long-term endeavor, and the thing to keep in mindwhich has changed, at least
brieflythe way to create an exit strategy is to create a company that makes money.
If a company makes money, you will have multiple opportunities to exit that company with
somebody buying you, somebody taking a piece of it. But companies are built to make money,
and that's the thing that you have to remember, and that takes a long time. If you put the
exit strategy before making money, you have a high probability of failure.
AUDIENCE MEMBER: You've all said that it takes a good bit of time to obtain
financing, for startups, to get money to get your company going. But in this very
fast-paced new environment we all seem to be working in, what can one do in order to get
money quickly so that the competition doesn't beat you out, if you're a small company.
MR. MAY: The main thing is to be as creative as possible, to network with as
many of your peers who have been through this, mentors. You cannot assume that venture
capital alone, the big V big C, is available. It is a very small tip of the iceberg and
you have to look at all the other funding opportunities and be working on them at the same
time. So whether it's angels, whether it's suppliers, whether it's your friends and family
and a second trust, you cannot wait for the answer from the stack that's on the desk until
you go to the nextyou should be going parallel tracks at all times and trying to
find out who in the community is finding what creative sources, and then tap into those
yourself. But never assume that what was used five years ago or what the venture
capitalists want is the only way to go.
AUDIENCE MEMBER: I have a tie on, so I apologize for the tie. I'd like to get
comments concerning the use of venture capital to acquire other companies. My operation
has acquired two companies, but we need about three more that we've eyeballed to crush the
competition. We need cash to acquire these companies. There's a lot you can do with equity
but you can't do it all with equity. So I'd like comments from the investment group and
advisors on how do you go about getting the money to buy otherswe have to buy them
in order to make some real money.
MR. MAY: Just as an aside, what you're describing to me is this phenomenon we're
getting in the community of merchant bankers and investment bankers. Venture capitalists
are patient money. They want to grow companies. In general, they are doing this over a
three-to-five year period for their limited partners. In this community we haven't had
that much M &A, investment banking, merchant banking, which is coming into this area
in droves. Carlyle, Thayer, you name it. There are a number of opportunities, special
funds to look at opportunities as opposed to long-term capital, you may want to look at
that as well.
MS. SMITH: Frank Tower, do you have anything to add to that?
MR. TOWER:, John makes a good point that you've got to pick the right partner
and it is going to be a merchant bank or an investment bank that's going to help you. But
as you are putting your plan together, feel free to chat with a commercial banker or a
merchant banker and find out how much would he be willing to take a piece of this, because
it is going to be a mix of debt and equity, and you're very rarely going to find an equity
player to take the whole thing or a debt player to take the whole thing.
MS. SMITH: I think our networking session would be a good chance to get some
follow-up on that.
Part 6: KEEPING SECRETS
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